The Truth About China

The world’s economy this month whirled around the market volatility, in which China had the starring role, since it infected the rest of the world in its violent sequence of highs and lows in share prices, as if on a roller coaster trip. The trigger seems to have been the arising of fear regarding the fragile heath of the World economy, with the belief that the Yuan’s devaluation, taken on the days of the plummet, signaled that China, the second biggest economy in the world, was hiding that it was in fact way worse than it seemed.

At the end of the month the tremors seem to have stopped. After having more than doubled the value of its shares in the last three semesters (most of the corporations belong to the State) the tremendous fall in July and August seemed to be about to evaporate all that growth.

It wasn’t thus. But it cannot be said that it’s that time to go back and start buying Chinese shares; caution is required. This market had a behavior that exceeded the margins of fundamental principles and as such something totally unusual could happen. The contagion was tremendous all over the world. As an example, simply the loss of the S & P 500 was a trillion dollars. And even though the Dow Jones rebounded in the last days of the month, it is 10% under the highest point achieved on May 2015.

What happened is considered a market adjustment. Market adjustments are three times more frequent than recessions, and they do not always foretell the arrival of difficult times. In fact, the last adjustment over 10% was in 2011 and the world economy’s growth has been sustained since then.

Among the detritus from the storm we can highlight the following: on the one side that the world assimilates that China’s growth epoch of more than two annual digits (12% to 15%) has given place to a less vigorous one, that can well be under the 7% announced by its authorities; consequently, its high oil consumption, as well as the immense volumes of metals and other commodities that promoted high prices and development in supplying countries will lower sensibly with clearly foreseeable consequences; but at the same time, the conviction rises that the growth of the United States, which is now expanding at a rate of 3.7% annually, higher than the 2.3% projected by experts, and the normality with which Europe seems to continue its low but sustained growth, after the apparently resolved Greek crisis, will be able to ameliorate the negative impact of China’s deceleration on the world’s economy.

One other thing: Due to globalization and the speed of information, market volatility will be the new normal. The plummets and rising races occur in good part due to the immediate contagion of rumors and the enthusiasm generated by news that quickly spread globally. Finally, Oil’s low prices, which on the one hand have favored the inhabitants of buyer countries, could be revised, since its rumored that Saudi Arabia, whose decision of not ameliorating its production volume in order to not lose market share precipitated the fall in price, could be reviewing its position in conversations with other OPEC members, searching for a minimum or fair [price] floor, as long as such measure does not prejudice its quota within the buyer market.

The low 0.2% annualized inflation in Europe makes us assume that the European Central Bank will continue its program of injecting up to 1,100 billion Euro in cash on a monthly rhythm of 60 billion. Plus, the red alert started by the plummeting of the world stock exchanges has made some question the convenience of the FED augmenting interest rates in the United States, almost proclaimed for this month of September, during a time in which the smoke of that explosion has barely dissipated, which was considered of high risk for the United States economy.

The election called for September 20 in Greece should not affect the current European climate of economic tranquility. Until now it seems that, even if there is a disillusionment of the leftist youth with leader Alexis Tsipras, for his rotund turn-around on his anti-austerity policy, which gave him and his Syriza party the victory in the January 2015 elections, it is considered that the majority of the population wants to stay within the Eurozone. For that reason, it will give Tsipras a second opportunity to govern the Country in the hard times, in which it will have to comply with the creditors’ demands, who, again, have rescued Greece from economic collapse, granting them another loan, this time for 86 billion Euro, to pay the immediate maturities, within a larger rescue program, with probably lower rates and longer terms, but in exchange it will have to adjust to a disinvestment program, cuts in social expenditures, tax increases and accelerated reduction of its budget deficit.

Generally speaking, the uncertainty of the month pressured the countries to concede little improvement in sovereign bonds rates, except Greece, whose yield went from 12.21% to 9.26%. During the month, all the stock exchanges fell on the closing. In the United States with more than 6% on average. In Europe with more than 7% on average. In Asia with close to 10% on average. In Brazil with more than 8%. In Argentina the bonds rate decreased from 10.27% to 9.6% and shares decreased just 0.6%.

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